Childcare Business Valuation and Deal Structure

Business valuations, particularly the ones related to tax compliance and loans, are beholden to using a standard of value known as “fair market value” (FMV). FMV requires an all cash, or cash equivalents” be paid at the time of sale.

However, in an actual transaction, the value of a childcare center business is dependent on the deal structure. Deal structure changes the taxes and the debt service of the transaction. In most cases, an “all cash” value is going to be lower than the one with Seller Financing due to higher cost of capital associated with equity.

Seller Financing. The amount of financing the seller provides to the buyer affects the price of the business. Based on the business sale/acquisition transactions in BizComps, a database of small business transfers, businesses that are sold without any seller financing sell for 10% to 20% less than businesses that sell with seller financing.
Stock Sale / Asset Sale. Most childcare centers are “assets sales”. However, if the business sale is instead a “stock sale”, it can result in higher income taxes to a buyer because goodwill is not tax-deductible and depreciable assets cannot be “stepped up” and depreciation charges increased. In addition, the buyer assumes all hidden liabilities. For these reasons, a buyer’s valuation of a “stock sale” transaction will result in a lower valuation than an “asset sale”.
Allocation of Sales Price. The sales price is allocated to various asset types such as fixed assets (tables, chairs, vehicles, …), goodwill, inventory, and consulting during the transition time. Each different asset can be tax-deductible or depreciated/amortized by the buyer over one to 15 years. The sooner the sales price becomes tax-deductible to the Buyer, often the greater the tax benefit over other asset types that are depreciated/amortized over a longer period of time. For this reason, a buyer may value a business less if more of a purchase price is allowed to assets that are tax-deductible over 15 years.